8/12/2019 Doubleline June 2014 Commentary (1)
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Quarterly Commentary
June 2014
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Overview
Throughout the first half of the year risk assets
connued to appreciate along with U.S. Treasury
(UST) prices, meanwhile domesc corporaons haveengaged in a series of mergers and acquisions
(M&A) acvity. A connued lowinterest rate
environment, suppressed risk premia overseas, slow
growth in demand, record corporate profitability,
record levels of cash holdings by the corporate sector,
and the interacon of all these factors are likely
contribung factors. Yeartodate (YTD) North
American M&A volume has been almost $1 trillion,
with the second quarter of the year accounng for
$544.8 billion of this total. A connued lowinterest
rate environment, suppressed risk premia elsewhere,
slow growth in consumer and business demand,
record corporate profitability, record levels of cash
holdings by the corporate sector, and the interacon
of all these factors are likely contribung factors. The
proposed purchase of Time Warner by Comcast for
$68.4 billion, and DIRECTV by AT&T for $66.0 billion
during the first quarter represented the two largest
deals of the year then, but the second quarter also
saw massive proposed deals from Valeant and
Medtronic each above the $45 billion mark. Monthly
deal volumes above the $150 billion mark that have
been common in 2014 are reminiscent of the heady
levels of 2007. This sort of bullish senment was also
Quarterly Commentary
expressed in the 5.23% total return of the S&P 50
Index during the second quarter, with 2.07% retur
during June alone. Bond returns, as measured by thBarclays U.S. Aggregate Bond Index, were similar
robust in the face of doom and gloom coming into th
year, with a 2.04% return during the quarter. Bein
long risk has been the posion to be in thus far
2014, but economic indicators could be interpreted a
suggesng quite different posioning.
Surely the most surprising economic indicato
received during June was revised data showing Re
U.S. Gross Domesc Product (GDP) contracted at
2.90% annualized rate during the first quarte
Consumpon growth was significantly belo
preliminary esmates, and a decline in investmen
trimmed nearly 2% from growth alone. The headlin
unemployment figure connued to fall finishing th
quarter at 6.1%, but the proporon of worke
considered under employed was unchanged on th
quarter at 6.0% of the labor force. The combined ratof those unemployed or underemployed of 12.1
remains highly elevated relave to levels seen befor
the Great Recession. Add in a labor force parcipao
rate reminiscent of the late 1970s and the labo
market does not look as robust as depicted by th
headline unemployment rate alone. The world
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largest economy added 816,000 jobs in total during
the quarter, however, offering something of a silver
lining. Junes Federal Reserve (Fed) minutes suggest
the Fed Governors are cognizant of many of these
(and other) weaknesses that connue to permeate
the economy so many years aer the official end of
the Great Recession, and the tone regarding future
rate increases remains quite dovish. Low levels of
inflaon corroborate this plan of acon. What
remains to be seen, however, is if the economic data
will eventually substanate the bull market that
connues mostly unabated in 2014.
U.S. economic data released in the second quarter
helped to paint a picture of an economy emerging,
albeit unevenly, from a weak first quarter likely ed
to unusually severe winter weather that affected
consumers across much of the naon. The third
revision for first quarter Gross Domesc Product
(GDP) was reported as shrinking by 2.9%, wellbelow1.8% consensus esmates and the prior revision of
1.0%. Sll, more recent data released in June
illustrated the economy may be recovering: nonfarm
payrolls added 288,000 jobs for the month and the
unemployment rate dipped to 6.1% (thought the
Labor Force Parcipaon Rate remains quite low at
62.8 according to the Bureau of Labor Stascs).
Consensus esmates had been for a gain of only
215,000. Other data points, such as factory orde
shrinking in May and the manufacturing secto
expanding at a slightly slower pace for June, painted
somewhat more mixed picture.
Minutes released from the Federal Open Marke
Commiee (FOMC) meeng on June 1718 showe
that the Fed may be leaning toward ending its bond
buying smulus program in October. Though QE ma
end by early fourth quarter of this year, some Fe
board members remain concerned enough about th
economy to keeping rates low wellinto 2015.
couple" policymakers thought the Fed "may need t
allow the unemployment rate to move below i
longerrun normal level for a me in order to kee
inflaon expectaons anchored and return inflao
to its 2% target, according to the FOMC minute
Chairwoman Janet Yellen herself stated in the Jun
18th
, 2014 press conference that the Fed reaffirme
its view that a highly accommodave stance o
monetary policy remains appropriate.
The eurozone economy remains extremely sluggissupporng the European Central Banks (ECB
addional easing policies over the quarter. Consume
prices grew by just 0.5% for the 12months endin
June, less than half the ECBs 2.0% target. Consume
confidence unexpectedly fell in the month of Jun
while ECB data indicated that lending to companie
and households fell for the 25th
straight month
May. In early July, ECB President Mario Draghi stated
the key ECB interest rates will remain at presenlevels for an extended period. The ECB furthe
released details of its latest TLTRO, whereby bank
will gain access to funding that they can hold for a
long as four years if they maintain or increase the siz
of their loan porolio to firms and households.
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Emerging Markets Fixed Income
Markets broadly rallied in the second quarter of 2014:
mixedtoimproving economic data from developed
naons combined with central banks broad policies
to maintain low interest rates aided with offseng
bouts of geopolical noise from varying emerging
market economies. Risk assets, such as U.S. and
internaonal stocks rallied, along with a number of
commodies such as copper and crude oil. 10year
UST yields fell April through May, before rising in June
and ending the quarter 19 bps ghter at 2.53%. In EM
corporate debt, spreads ghtened by 22 bps, as
investors connued to pour cash into the space in an
apparent search for higher yielding assets.
For the quarter, EM debt as represented by the JP
Morgan Emerging Markets Bond Index Global
Diversified (EMBI) returned 4.76%, the bulk of that
performance came in the month of May. EM
sovereign bonds outperformed both EM corporates
and local bonds in this period.
China, the worlds second largest economy, showed
some improvement in the month of June: the official
Source: JP Morgan
(Past performance is no guarantee of future results.)
manufacturing Purchasing Managers Index (PMI) ros
to 51.0 in June from 50.8 in May, indicang slight
greater expansion across the sector. HSBCs Chin
manufacturing PMI, which is more representave o
smalltomedium firms, was nearly unchanged, whi
the HSBC Services PMI rose to a 15month high o
53.1. The Chinese government connues t
implement targeted smulus packages to help ensur
the naon hits its 7.5% growth target, as th
economy rebalances toward domesc consumpo
For the second quarter, YoY GDP growth just hit th
official 7.5% target. The PBoC this year has started
100 billion yuan quota for relending, aimed a
agriculture and small businesses, while also offerin
300 billion Yuan toward lowincome housing. Crack
have appeared this year in a Chinese economy tha
has seen much of its growth fueled by investment.
solar firm defaulted in March, which was the fir
onshore default in China. Numerous trust produc
and associatedfi
rms are struggling to meepayments, with nine trust product defaults in the fir
five months of 2014, and more disnctly possible
the laer half of the year. Finally local governmen
are under pressure from debt ed to slumpin
property markets, with a local government financin
vehicle in Jinan City defaulng on its loan, the fir
official disclosure of such a default.
The second quarter was characterized by a number o
geopolical crises springing up in emerging market
from the headlinegrabbing Russian buildup of troop
along the Ukrainian border in conjuncon with civ
war in eastern Ukraine; to the May ouster of th
elected Thai government by the naons militar
following widespread protests and gridlock; to th
surprise June aack and rapid gains made b
the Islamic State of Iraq and the Levant (ISIL) acros
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much of western Iraq; to the widening strike
paralyzing much of South Africa. Each of these
situaons remains extremely fluid, though broader
markets have calmed aer inial spikes in volality.
Though Moscow has ordered troops to stand down
from immediate borders, and has engaged somewhat
in dialogue with Kiev, the supply of arms and material
to separast rebels does not appear to have stopped.
The Ukrainian militarys recent dedicated push into
the eastern provinces does appear to be encircling
rebel forces within a few key cies. In Thailand, the
military remains in control of the government, with
much of the country on lockdown and generalelecons not planned unl October 2015.
In June, Iraq witnessed Islamist guerillas overwhelm
weak government forces in a surprise aack from
Syrian territory. Brent crude spiked above $114 as the
fate of the Shiitemajority government stood in
doubt. Government forces did manage to stabilize
front lines by late June, though ISIS connues to
control a large poron of the country and threaten
instability. In South Africa, 220,000 metalworkers
have gone on strike and paralyzed the auto industry.
This acon is occurring only weeks aer planum
workers returned to mines aer a fivemonth strike. A
fourweek strike by the same metal working union
last year cost the sector around $2 billion.
In Latam, the U.S. Supreme Court denied a final
appeal by Argenna against a lower court ruling that
it had to pay holdout creditors in a nearly decadelong legal saga. This situaon remains extremely fluid.
Inially it appeared that President Crisna Fernandez
de Kirchners government would aempt to transfer
current holders of Argennean New Yorklaw debt
into locallaw debt in an effort to circumvent the U.S.
courts ruling, but fairly recent indicaons have
emerged that the government may be nearing a
selement with holdout creditors. Argennas debt
has performed strongly this quarter in ancipaon of
some sort of resoluon to the saga. Many eyes wer
also on neighboring Brazil which is hosng the Wor
Cup this summer. On the economic front, thoug
Brazil connued to undershoot its primary deficit go
of 1.9%, the Real was amongst the top performing EM
currencies in the quarter with a 2.6% gain. Som
investors have looked favorably upon centerle
President Dilma Rousseff fading in polls below 40%
Centerright opposion candidate Aecio Neves
perceived as more marketfriendly connues to bui
popular support heading into October elecons, risin
from the teens in polling early this year to low20
currently.The first half of 2014 saw a number of elecons tak
place worldwide to varying degrees of impact, fro
the surprising outrightmajority in parliament fo
Indian Prime Minister Narendra Modi lending fuel to
rally across Indian assets, to the ghtening of the rac
for Indonesian president cooling off a strong rally
debt and currency in the Southeast Asian naon. Th
bulk of elecons for this cycle have passed, barrin
select cases like Brazil, and now aenon will turn t
the ability of new governments to implement refor
policies promised during their respecve elecons.
The second quarter of 2014 saw investors return t
emerging markets funds in force, with all first quarte
oulows reversed for a yeartodate (YTD) inflow o
$5.3 billion. A total of $18.2 billion entered EM fund
in 2Q14, with $6.1 billion of these inflows occurring
June. Flows into hardcurrency funds outnumberelocalcurrency denominated funds by nearly fourto
one in this past quarter. In June, and during th
second quarter overall, a majority of inflows entere
funds that are benchmarked to corporate an
sovereignblended indices. We believe the new issu
pipeline will remain relavely robust despite th
summerme.
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Investment Grade Credit
Investment grade corporate credit connued to post
healthy returns during the month of June and in the
second quarter. Over the course of the past month
and quarter, investment grade corporate credit
spreads have ghtened as heavy supply has met
healthy demand. A favorable credit environment has
been posively influenced by the FOMCs dovish
forward guidance of the Feds zero interest rate
policy, signs of an improving U.S. economy and
relavely low market volality.
Investment grade credit recorded a second quartertotal return of 2.71% and has gained 5.70% YTD, as
measured by the Barclays U.S. Credit Index. The
Index ended the quarter 7 bps ghter and
outperformed duraonmatched UST by 81 bps. For
the month of June the Barclays U.S. Credit Index
ghtened by 2 bps generang a total return of 0.08%,
and outperformed duraonmatched UST by 26 bps.
This brings the streak of posive returns to six
consecuve months.
For the first six months of the year fixedrate gross
investment grade supply came in at a robust $645.6
billion making it the largest halfyear of issuance on
record. Issuers priced approximately $291.7 billion of
fixedrate gross investment grade supply for the three
months ending June 30, 2014 led by Apples $12
billion in April, the largest transacon by a sing
issuer. Throughout the quarter, there was an increas
in event risk as a number of major M&A transacon
(e.g., DirecTV/AT&T, Covidien/Medtronic, Hillshire
Tyson among others) took place. Fixedrate gro
investment grade supply for June was approximate
$92.2 billion. Industrials led gross supply, issuin
$44.5 billion of investment grade debt.
Within investment grade, investors have connued t
reach down the credit spectrum as BBBs have poste
excess returns of 38 bps for the month, 135 bps fo
the quarter and 263 bps for the first half of the yea
Within investment grade for the month of June, th
bestperforming sectors included Home Construco
(+1.37%); Metals (+0.99%); Oil Field Service
(+0.72%); Airlines (+0.57%) and Natural Gas (+0.54%
The worstperforming sectors were Technology
0.05%); Food & Beverage (0.03%); Industrial/Other
0.02%); Midstream (0.00%); and Refining (0.03%
The bestperforming sectors for the second quarte
included Sovereigns (+2.18%); Cable Satellit
(+1.76%); Metals (+1.76%); Paper (+1.71%) and Hom
Construcon (+1.70%). At the other end of th
spectrum the worstperforming sectors were Gamin
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High Yield
Through the second quarter, highyield bonds
connued to benefit from a combinaon of
accommodave global central banks, stagnant growth
trends, low market volality and benign UST yields.
The Ci HighYield CashPay Capped Index returned
0.82% during the month of June, 2.29% during the
quarter and 5.31% YTD. The Indexs yieldtoworst
was 4.97% at June monthend, ghtening 8 bps for
the month, 21 bps for the quarter and 63 bps YTD.
The spreadtoworst of 3.75% ghtened 17 bps during
the month, 13 bps during the quarter and 40 bps YTD.
The allme low on spreadtoworst sits around
2.70%, set in June 2007, and the spread between
investmentgrade and highyield bonds stands slightly
above 3%, versus the allme low of roughly 1.75%
(also set in June 2007).
While the U.S. economy faltered in the first quarter,
this was not reflected in highyield companies
earnings. According to Barclays, yearonyear EBITDA
growth for the broad market was 10% for the fir
quarter and has been increasing for the last fou
consecuve quarters. Debt growth has slowed dow
significantly since last year and coverage raos are a
their allme highs, aided significantly by low intere
rates. This divergence stems from increased busine
spending, which has been boosng highyie
companies earnings, relave to weak consume
spending that has been dragging GDP down. Secto
level data reflects this as retail issuers have bee
struggling recently, while companies serving othe
businesses have seen strong earnings growth.
The best performing High Yield sectors during th
month included Retail Food & Drug (+2.17%), Reta
Stores Other (+1.42%) and Metals/Mining (+1.19%
The worst performing sectors were Oil Equipmen
(1.09%), Texle/Apparel/Shoe Manufacturin
(0.00%) and Paper & Forest Products (+0.15%). Fo
the quarter, the best performing sectors wer
Diversified Telecommunicaons (+7.99%), RetaiFood & Drug (+7.31%) and Airlines (+7.14%). N
sectors had negave quartertodate (QTD) return
but the laggards include Gaming (+2.29%), Texle
Apparel/Shoe Manufacturing (+2.55%) and O
Equipment (+2.58%).
Highyield mutual funds had net inflows of $1.0 billio
in June, according to Lipper, taking the net quartert
date and year
to
date infl
ows to $3.0 billion and $6billion, respecvely. Highyield bond newissu
volumes slipped slightly in June to $36 billion from
$43 billion in May, and acvity was predominate
driven by refinancing (72%). Aer pricing a recor
$399 billion of highyield bonds 2013, the aracv
yield environment and increase in M&A acvity le
volumes elevated again in the first half of the year a
$209 billion. With regard to acvity in the secon
Quarterly Commentary
1. EBITDA refers to earnings before interest, taxes, depreciaon and amorzaon.
Source: S&P Capital IQ Leveraged Commentary and Data (LCD)
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quarter, highyield bond volume totaled $121.2
billion, narrowly seng a new record. Highyield
bond volume used for acquisions during the second
quarter totaled $27 billion, the most since 2007.Addionally a notable 62% of highyield issuance
during the second quarter was used for refinancing,
versus 57% in the first quarter and 56% in 2013.
No highyield bond issuers defaulted in June as
acvity remains extremely benign. The parweighted
U.S. highyield default rate decreased to 2.06%, down
from an upwardly revised 2.11% in May. Excluding
TXUs default, the parweighted default rate declined
to 0.70%, from 0.75% in May. The issuer weighted
highyield default rate decreased to 1.56% from
1.66%.
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highest returns were concentrated in the lowe
credit rangs. Yeartodate CCC loans returned 7.33%
Bs returned 2.34% and BBs generated a 1.54%. Th
defaulted category had the largest impact on th
Index with a 27.69% return led by strong performanc
in Energy Future Holdings.
Retail loan mutual funds reported an oulow of $2
billion in June, which followed a $2.1 billion oulow
May. The June retail withdrawal was the large
oulow since August 2011, when $5.2 billion wa
redeemed. Second quarter retail fund oulowtotaled $6 billion reducing the yeartodate reta
inflows to $1.7 billion. Furthermore, exchangetrade
funds (ETFs) focused on U.S. bank loans also hav
experienced modest oulows. These ETFs took
about $6.5 billion in 2013 and the first quarter of th
year, but $302 million flowed out in the secon
quarter.
Offseng retail oulows, CLO volume in June set
record with $13.8 billion of new issues eclipsing th
previous record of $13.5 billion set in August 2006
Considering both CLO and retail flows, the loa
market received just over $11 billion of inflows fo
the month. CLO issuance yeartodate is now $60.5
billion from 113 transacons. Net loan marke
inflows yeartodate from CLO and retail acvit
stands at $53 billion. June new issuance increased t
$63 billion from $37 billion in May. Meanwhile, yea
todate loan new issuance was $322 billion dow
from $353 billion issued during the 1st half of 201
mainly due to a sharp drop in refinancing acvit
Total loans outstanding increased 11% from yearen
2013 to $756 billion.
For the most part, investors have been aracted t
such funds because they offered beer yields in la
Bank Loans
During the first half of 2014 the loan market
benefied from record Collateralized Loan
Obligaons (CLOs) new issue volumes,
accommodave global central banks, stagnant growth
trends, and low market volality. The S&P/LSTA
Leveraged Loan Index returned 0.58% for the month
of June. The change in market value contributed
0.20% to the monthly return. The Index returned
2.60% YTD with price movement contribung 0.31%
to total return. The Index yieldtomaturity (YTM)
decreased to 4.65% in June from 4.66% in May and
4.94% at the beginning of the year. The discounted
spread to a 3 year life was LIBOR plus 446 bps.
There were no new defaults in June, the second such
month in a row. As a result, the default rate declined
to 4.41% from 4.60% in May. Excluding Energy Future
Holdings, which represented the largest default in
history at $19.5 billion, the default rate would be at a
21 month low of 1.08%. As in prior periods, the
Quarterly Commentary
Source: S&P Capital IQ Leveraged Commentary and Data (LCD)
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years lowrate environment than could be had in
investmentgrade bonds and most investors expected
the floang rates would cushion them as interest
rates rose. While the strong rush of inflowscombined with the return of covenantlite loans into
the space has been worrisome for some we see the
potenal for more buying opportunies in the space.
We sll maintain a relavely conservave posion in
the fund, valuing higher quality credits.
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been raised to between $85 billion and $100 billion.
Except for AAAs, 2.0 CLO debt spreads for the rest o
the capital structure have widened during th
quarter. Spreads up and down the capital structur
are sll nowhere near the ghts of 2013. New issu
AAA spreads sll hover in the 150 DM area. Top e
managers AAA have priced inside of 150 DM whi
less known managers are priced about 10 bps wide
Near the top of the capital stack spreads for 2.0 A
and As have only widen by about 515 bps compare
to the previous quarter and 2013 year end. Farthe
down in the mezzanine tranches, the 2.0 BBB and BB
spreads have widened out by roughly 2550 bps fro
last quarters average spreads. 1.0 CLO spreads fo
AAA connue to ghten by 10 bps as more deals ex
reinvestment period and pay down. 1.0 AA, A an
BBB spreads were relavely unchanged for th
quarter. Since 1.0 BBs sele immediately and have a
aracve carry, spreads have come in by 25 bps.
Collateralized Loan Obligaons (CLOs)
Collateralized Loan Obligaon (CLO) issuance
connued along at a steady and strong pace. June
was the most acve month ever with 25 CLOs priced
with a total of almost $13.8 billion. The previous high
was set in August 2006 with $13.50 billion in new
issuance. With Junes issuance, the total issuance year
to date stands at $60.57 billion across 113 deals. If
issuance connues at Junes pace, the new issue
market for 2014 is expected to be around $100
billion.
Money connued to flow out of retail loan funds inJune for the 11th straight week, reversing the 96
consecuve weeks of inflows. The reversal in retail
fund flows was one of the propellers of the increase
in CLO issuance. As CLOs fill the space le by retail
loan funds, loan spreads started to ghten slightly
from the wides in May. Sll, relavely wider spreads
have improved the arbitrage opportunity and have
made it easier to place the AAA and equity tranches.
New issue spreads for AAA came in slightly in June
from the 150 DM (discount margin) area to mid 140
DM for top er managers. Newer managers are sll
pricing in the 150 DM area. The rest of the CLO debt
tranches spreads were unchanged in June and are sll
wider than the spreads at the year end of 2013.
CLO new issuance connued to pick up steam and set
a record issuance high in the second quarter. The past
three months each had issuance over $11 billion for atotal of $35.25 billion for the quarter. The previous
record was $32.8 billion set during the second quarter
of 2007. Part of the increase in issuance is due to the
size of the deals. The average size for a deal in the
second quarter was $570 million, with a few deals
totaling over $1 billion. In 2013 the average deal size
was $481 million. Due to the increase in issuance and
size of deals, forecasts for 2014 total issuance has
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will the possibility of a rate hike be considered. Many
Wall Street economists feel that the earliest
possibility of a rate hike will be the second quarter of
2015.
During the quarter, there was lile development on
the reform of the Government Sponsored Enterprises
(GSEs) as it appears to be a situaon where the
centrists of both polical pares are in agreement,
but to garner enough support the current bill will
have to aract votes away from the center. It is likely
that any mutually agreeable soluon will result in
higher mortgage rates than they would be under thecurrent structure of the GSEs. Addionally, any
policies that are agreed upon will most likely be
phased in over a 5year period. In midMay, the
Federal Housing Finance Agency (FHFA) released their
2014 strategic plan for the conservatorship of the
GSEs. To note, the HARP (Home Affordable Refinance
Program) cutoff date will remain the same which
means we should connue to see HARP having less
and less of an impact due to burnout. The FHFA
wants to increase the amount of risk transfer bond
issuance in 2014. It is this risk transfer (or privately
held first loss pieces) that is at the core of GSE reform
in discussions on Capitol Hill. The FHFA reiterated the
plan is to wind down the GSEs to at least $250 billion
by 2018, while currently the porolios are
approximately $450 billion in size.
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modificaons connue to account for the majority o
loan modificaons.
News of mortgage ligaon found its way back int
the headlines during the quarter with news that non
back servicer, Naonstar, is being quesoned abou
the rapid growth of the firm and its handling of i
loan servicing volume. Many Naonstar service
bonds have experienced some disrupon in cashflo
as the servicer seeks to claw back principal an
interest on loans held on its books. Federal regulato
have put the company under scru
ny as its loan boohas grown rapidly while staffing has not grow
proporonally.
NonAgency MortgageBacked Securies
The second quarter of 2014 in the nonAgency
mortgage sector can be characterized by improving
fundamentals coupled with reduced trading volume.
The large liquidaon lists seen in the first quarter all
but disappeared. Instead, bid list volume was largely
driven by hedge funds and money manager selling.
Bid list volume was very consistent over the 3 months
with $11 billion of current face trading each month.
The bulk of the acvity was in AltA and subprime
collateral. Against this back drop of improving
fundamentals and ghter supply technicals, yields
ghtened during the quarter. Prime and AltA bonds
ghtened by approximately 25 bps while subprime
gapped in by 50 bps.
Mortgage rates declined during the quarter with the
30year fixed rate mortgage average rate falling from
4.3% in April and ending June at 4.15%. Despite the
modest decrease in rates, prepays were a bit mixed.
Prepays were up in April and slightly in May, then
declined in June, resulng in largely unchanged
prepay rates during the quarter. Liquidaon rates
behaved in a similar paern with rising liquidaon
rates early in the quarter, and declining liquidaon
rates in June, again resulng in largely unchanged
liquidaons during the quarter. The pace of loan
modificaons connues to slow down; however, rate
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Mirroring that trend, the office delinquency rat
improved by 16 bps to 6.44%, the Retail delinquenc
rate improved by 11 bps to 5.43%, Mulfami
delinquency improved by 43 bps to 9.93%, an
Lodging improved by 32 bps to 5.39%. The Moody
RCA Commercial Property Price Indices (CPP
naonal major markets composite index increase
0.37% in May 2014 while nonmajor markets were u
1.51%. June loan loss severies averaged 45% ove
$932 million of loans liquidated according to Trep
Analycs.
Commercial MortgageBacked Securies
(CMBS)
The CMBS market ended the quarter with spreads
grinding ghter, buoyed by strong demand outpacing
limited new supply. Low market volality has led to
connued spread ghtening across the curve with
investors reaching for yield down the capital stack,
driving demand in mezzanine tranches off of new
issue deals. The June new issuance calendar consisted
of nine deals totaling $6 billion, an approximately
40% increase over both April and May, driven by five
largeloan singleborrower deals. The fourfi
xedrateconduit transacons issued totaled $3 billion,
consistent with April and Mays conduit new supply.
Twentyfour new issue conduit deals have priced YTD,
slightly outpacing 2013s 23 deals through June;
however, pool sizes have shrunk slightly, leading to a
10% decline in total conduit new issuance by balance
yearoveryear. Conduit new issuance remained
consistent throughout the quarter at approximately
$3.6 billion per month, down approximately $1 billionper month from the first quarter.
The CMBS poron of the Barclays U.S. Aggregate
Bond Index returned 0.18% for June and 1.31% for
the second quarter. For the month, legacy AAA
spreads ghtened by 2 bps to 84 bps over swaps. On
the new issuance side, the most recently priced new
issue deal AAAs priced at 78 bps over swaps, a 7 bps
improvement over the last deal priced in May and
BBBs priced at 315 bps, a 20 bps ghtening.
The overall U.S. CMBS delinquency rate fell by 22 bps
to 6.05% in June according to Trepp Analycs, which
makes it the 13th consecuve month of delinquency
improvement. The 30+ day delinquency rate by
property sector improved in all five categories, led by
industrial which posted a 55 bps improvement to
8.39% aer backing up by 25 bps the prior month.
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issues at 0.26% and 30year bond posng the highe
at 5.24% for the quarter. The Barclays U.
Government Index returned 0.13% in June, 1.34% fo
the second quarter and 2.66% YTD.
Treasury InflaonProtected Securies (TIPS
benefing from a comparavely long durao
returned 3.81% for the second quarter. The Barclay
U.S. Municipal Bond Index, also relavely lon
duraon, returned 2.59% for the quarter.
U.S. Government Securies
The UST market posted solid performance in the
second quarter, matching the posive return of the
first quarter. The support for UST prices came from a
variety of sources. Geopolical risk, especially the
turmoil in Ukraine and Iraq, provided a flightto
quality bid. A highly accommodave monetary policy
was cemented in place by the ECB, with combang
deflaon being the primary focus; the easy money
policy pushed European sovereign yields lower,
which, in turn, added to the downward pressure on
UST yields. Fed Chair Yellen helped the market as
well with some dovish comments that allayed
investor fears of a shitoward more aggressive policy
ghtening. Finally, speculave short posions, which
were instrumental in sparking the January rally,
persisted through the second quarter. Short covering
purchases were seen sporadically through the second
quarter.
Treasury yields fell modestly April. The rally picked
up speed in May and then held on through June. The
10year UST note yield ended the second quarter at
2.51%, down 21 bps since March 31 and down 51 bps
from 2013 yearend. The yield curve flaened
through June, for the full quarter and year to date.
The twoyear UST note yield rose three bps through
the second quarter, while the fiveyear note fell 11
bps in yield, the 30year bond yield fell 22 bps.
Returns followed a similar paern, with the twoyear
note posng the lowest return among the benchmark
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Fed policy will influence the sectors performance
the second half of the year and beyond, as th
prospects of higher interest rates may pull investo
away from gold and silver if inflaonary fears remacontrolled.
Livestock gained 5.13% aer live cale and feeder
cale returned 9.00% and 18.37% respecvely. Lean
Hogs were the only loser in the sector down by
2.68%. In thefi
rst two quarters of 2014 the livestocksector was the biggest winner, spawning a 20.90%
return with lean hogs, live cale and feeder cale up
27.62%, 16.78% and 24.53%, respecvely.
Industrial metals built the largest gain of any sector in
the second quarter delivering a 6.96% return. This
solid performance lied the sector into the black for
the first half of the year; ending the quarter 1.23%
higher than it began at the end of 2013. Much of this
return was collected by nickel with a return of 19.27%
in the second quarter on the heels of its 14.23%
return in the first quarter. This gain was mostly due to
increased demand for the metal as major economies
improve across the globe. Every industrial metal
achieved a gain. The future outlook for this sector is
posive as downside risks to the supply of lead and
zinc could liprices higher. Copper on the other hand
could face a supply glut if economic acvity in China
and the U.S. do not connue to increase as mulyear
supply projects are coming online.
Precious metals gained 3.34% in the second quarter
as a safe haven asset due to geopolical risks
emanang from Ukraine, Iraq and Hong Kong. This
caps the precious metals first six months of 2014 as a
posive one, with the sector up 9.63%. It is likely that
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2014 Asian equies were mixed with the Nikk
+3.17%, Shanghai Composite 0.74%, Hang Sen
+5.10%, and Kospi +1.07%. Japanese equies seem t
be supported by the prospect of large porol
allocaon shis into equies from Japanes
Government Bonds by large Japanese pension fund
Addionally, Japans first quarter growth was revise
substanally higher to 6.7% quarteroverquarte
(QoQ) annualized. Senment seems to be rising o
the possibility the PBoC will engage in moneta
easing to support growth across the country. India
equies, as measured by the SENSEX, rallied 13.76
in second quarter as Modi was elected to Prim
Minister. The market believes the new PM w
embark on farreaching reforms that will ulmate
boost growth.
Global Equies
Global equies as measured by the Morgan Stanley
Capital Internaonal All Country World Index (MSCI
ACWI) posted a 1.71% gain in June, while rallying
5.10% in the second quarter of 2014. U.S. equies
performed well in June with the S&P 500 and Dow
Jones up 1.91% and 0.65%, respecvely. Nasdaq and
Russell 2000 posted substanal gains up 3.9% and
5.15%, respecvely. US equies achieved stellar
returns during Q2 2014 with S&P 500, Dow Jones,
Nasdaq, and Russell 2000 up 5.52%, 3.08%, 6.07%,
and 3.57%, respecvely. The macro data out of the
U.S. was mixed in the second quarter with strong
labor data; however, first quarter GDP was revised
significantly lower to 2.9%. The Fed connued to
taper its monthly asset purchases by $10 billion as
expected at each of the FOMC meengs during the
quarter.
In Europe, equies were generally lower in June with
the DAX 1.11%, CAC 2.14%, and FTSE 1.47%. In the
periphery, equies were mixed with the FTSEMIB
1.60% and IBEX +1.16%. However, in the second
quarter European equies were generally higher with
the DAX +2.56%, CAC +0.26%, and FTSE +1.94% while
peripheral equies were mixed. The macro data
across the Eurozone was on the soer side with
inflaon connuing to run well below the ECBs
target. The ECB lowered its enre interest rate
corridor, taking deposit rates negave. At the same
me the central bank introduced a targeted long
term refinancing operaon (TLTRO), halted the
sterilizaon of Securies Market Programme (SMP),
announced preparatory work on purchases of asset
backed securies, and opened the door for outright
quantave easing.
Asian equies were mixed for the month of June with
the Nikkei +3.62%, Shanghai Composite 0.09%, Hang
Seng +0.47%, and Kospi +0.36%. Similarly, during Q2
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Important Informaon Regarding This Report
Issue selecon processes and tools illustrated throughout this presentaon are samples and may be modified periodically. Such charts are not the only tools used by t
investment teams, are extremely sophiscated, may not always produce the intended results and are not intended for use by nonprofessionals.
DoubleLine has no obligaon to provide revised assessments in the event of changed circumstances. While we have gathered this informaon from sources believedbe reliable, DoubleLine cannot guarantee the accuracy of the informaon provided. Securies discussed are not recommendaons and are presented as examples
issue selecon or porolio management processes. They have been picked for comparison or illustraon purposes only. No security presented within is either offered f
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Forwardlooking statements include, among other things, projecons, esmates, and informaon about possible or future results related to a clients account, or mark
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Rangs shown for various indices reflect the average for the indices. Such rangs and indices are created independently of DoubleLine and are subject to change witho
noce.
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